Brexit: the exit bill

Published Tuesday, December 12, 2017

When the UK leaves the EU it is expected to make a contribution towards the EU’s outstanding financial commitments – spending that was agreed while the UK was a member. The media have labelled this as an ‘exit bill’ or ‘divorce bill’, the EU see it as a matter of ‘settling the accounts’. The issue is being discussed in the first phase of Brexit negotiations under the title of the ‘single financial settlement’ (the settlement).

The first phase of negotiations between the UK and EU must make ‘sufficient progress’ on the settlement (and other areas that will disentangle the UK from the EU) before they can move on to areas of the future EU-UK relationship, such as trade arrangements. The EU says a methodology for calculating the settlement should be agreed before talks move on.

On 8 December 2017, an agreement in principle was reached on the first phase of negotiations, including the settlement. It is likely that the European Council – the leaders of EU Member States – will therefore rule that sufficient progress has been made in their 14/15 December meeting. The UK Government estimates that the settlement will cost around £35 billion- £39 billion.

The EU’s position for negotiations

The EU set out its position on the settlement ahead of negotiations. The EU’s position was built on the principle that the UK should honour its share of all the financial commitments made by the EU while the UK was a member. On the same basis, the EU said that the UK should be able to participate in, and receive funding from, EU programmes – such as agricultural funding – until the programmes close. Most programmes cover the period 2014 – 2020, but some spending is expected after 2020.

The EU’s position paper expected the settlement to include:

the UK’s participation in the EU budget

the termination of the UK’s membership of institutions such as the European Investment Bank

Most of the EU’s outstanding financial commitments arise from the EU Budget. The position paper expected the settlement to include spending committed in the EU Budget but not yet paid to recipients – often described as ‘reste à liquider’ – and the outstanding funding agreed for EU spending programmes in the current period. These two sources are the largest outstanding commitments identified by the EU. The EU’s liabilities and contingent liabilities should also be shared by the UK, according to the position paper.

The EU’s accounts do not apportion the EU Budget’s outstanding financial commitments to Member States, so a way for calculating the UK’s share must be agreed. The EU proposed that the UK should share the Budget’s outstanding commitments in proportion to its share of total contributions to the EU Budget over 2014-2018. In recent years the UK’s share, after accounting for the rebate, has been around 13%.

The UK is part of some EU spending outside of the EU Budget. For these programmes – such as overseas aid and spending to support Syrian refugees in Turkey – the EU expected the UK to continue to contribute as normal, in line with the specific rules and schedule for each, until they end.

The EU also proposed that the UK should cover the costs of Brexit – such as the cost of moving EU agencies from the UK – and that the UK’s shareholdings in the European Investment Bank should be returned to the UK.

The EU does not want the settlement to result in one single payment, but would rather see a schedule of payments overtime to be established.

The UK’s position during negotiations

The UK made no formal response to the EU’s position, nor was there a position paper from the UK on the settlement. However, in a speech in September 2017 the Prime Minster, Theresa May, suggested that the UK would meet its current EU budget plan (2014-2020) commitments so that EU Member States would not be made worse off as a result of the UK leaving. The Prime Minister also said that the “the UK will honour its commitments made during the period of our membership”. The UK did not publicly say exactly which commitments they thought should be included in the settlement.

Negotiations

The EU hoped that the UK would have set out its own position on the settlement, and that the two sides would have then negotiated their positions. The UK did not adopt this approach and during exit negotiations has interrogated the EU’s position on the settlement line by line and presented its own legal analyses of the commitments potentially to be included in the settlement, with the aim of bidding down the Commission’s position.

During negotiations the UK questioned legal aspects of commitments included in the EU’s position paper, although the David Davis – the Secretary of State for Exiting the European Union) – said that the UK views the settlement ‘as more of a political principle, a political obligation, than a legal one.’

Reaching a conclusion?

At the end of October’s negotiations Michel Barnier said that ‘deadlock’ had been reached over the settlement. However, he was positive that the deadlock could be broken, and that sufficient progress could be achieved in time for December’s European Council.

Following its October 19/20 meeting the European Council (the Council) concluded that the UK had not yet turned its pledge to honour its financial commitments into “a firm and concrete commitment”. The Council concluded that ‘sufficient progress’ had not been made in the first phase of negotiations and will next assess the situation at its December meeting.

In late November the media reported that an agreement-in-principle has been reached on the settlement between the UK and EU. This followed on from a decision taken by the UK Cabinet to expand the commitments it is willing to include in the settlement. No formal announcement was made at this point.

Agreement (in principle) reached

On 8 December 2017, the European Commission (the Commission) and the UK Government published an agreed methodology for calculating the settlement. The agreement reached on the settlement was part of a joint report agreed by the Commission and the UK on progress during the first phase on negotiations. This is an agreement in principle and will not be legally binding until it enters into a final Withdrawal Agreement. It is a political agreement at this stage.

The underlying principles of the methodology are that:

no EU Member State should pay more or receive less because of the UK's withdrawal from the EU;

the UK should pay its share of the commitments taken during its membership; and

the UK should neither pay more nor earlier than if it had remained a Member State. This implies in particular that the United Kingdom should pay based on the actual outcome of the budget

This last point means that the UK will not make any payments earlier than they would have if they had remained in the EU.

The key settlement details in the joint report are that the UK will:

contribute to and participate in the 2019 and 2020 EU budgets

continue to receive EU funding for the programmes that are part of the 2014 – 2020 budget plan

receive a rebate on its net contributions

contribute towards the EU’s outstanding budget commitments at 31 December 2020 (these are budget commitments that have been made, but not yet paid)

contribute towards financing some of the EU’s liabilities – obligations to pay something – incurred before 31 December 2020. EU staff pensions are the main source of such liabilities

remain liable for the EU’s contingent liabilities – potential liabilities that may occur depending on the outcome of an uncertain event – which relate mainly to financial guarantees given and to legal risks

receive back the €3.5 billion of capital it has paid into the European Investment Bank in 12 instalments from 2019, and will receive back the relatively small amount of capital it paid into the ECB on withdrawal

continue to participate in some of EU’s overseas programmes, such as the European Development Fund, until the current round ends

The UK’s share of financial commitments is to be based on the UK’s percentage share of total contributions to the EU Budget over 2014 – 2020. This share will be applied to commitments that are accounted for on an EU-wide basis; in the above list this includes outstanding budget commitments, liabilities and contingent liabilities.

The settlement will be drawn up and paid in euro.

The second phase of withdrawal negotiations will address the practicalities for implementing the agreed methodology and the schedule of payments.

The European Commission has recommended to the European Council to conclude that sufficient progress has been made in the first phase of withdrawal negotiations. The European Council is likely to reach such a conclusion at its 14/15 December meeting.